Why the type of information observable to peers matters: Peer monitoring and performance measure manipulation

Abstract

We investigate whether and how perceived observability of two types of information to peers – effort and performance – affects an agent’s engagement in performance measure manipulation. We propose that the relation between performance observability to peers and manipulation of performance measures depends on effort observability to peers. Data from two field surveys of mid- and lower-level managers in the United Kingdom support our prediction. The results show that the lower effort observability to peers is, the more performance observability to peers heightens performance measure manipulation; and that the higher the performance observability to peers is, the more effort observability to peers lowers performance measure manipulation. Our results thus suggest that performance observability and effort observability to peers are complementary. Our findings have important implications for literature on the design of management control systems and peer monitoring. Moreover, they help firms make better use of transparency to minimize the manipulation of performance measures.